Nursing losses, shareholders await Buffett letter

Berkshire stock hits 51/2-year lows on concern about financials

By

AlistairBarr

SAN FRANCISCO (MarketWatch) -- Berkshire Hathaway Chairman Warren Buffett's letter to investors on Saturday may be the most highly anticipated missive from the legendary investor in almost a decade as his conglomerate suffers from big exposure to the troubled U.S. financial-services sector.

Berkshire is expected to report quarterly operating earnings of $1,486.50 per Class A share, according to the average estimate of two analysts polled by Thomson Reuters. In the final quarter of 2007, Berkshire generated operating profit of $1,518 per Class A share.

Berkshire's book value will likely be hit by the falling price of investments in shares of banks and other financial-services companies including Well Fargo & Co.
WFC, -0.48%
American Express Co.
AXP, -0.08%
U.S. Bancorp
USB, +0.33%
and M&T Bank Corp.
MTB, -0.81%

Those stocks dropped 34% on average during the fourth quarter. Such losses aren't realized, so they won't affect Berkshire's quarterly earnings.

However, Buffett prefers to be judged on Berkshire's book value, which measures the company's assets minus liabilities. Such losses on stock investments will leave book value down 8% during the fourth quarter, according to estimates by Gary Ransom, an analyst at Fox-Pitt Kelton.

"He's really getting hit because he has a lot of credit-sensitive businesses," said Jeff Auxier, manager of the Auxier Focus Fund, who owns Berkshire shares.

Berkshire class A shares have dropped 44% in the past year. They hit a 51/2-year low of $73,500 earlier this week.

The last time Berkshire stock slumped to multiyear lows was in early 2000, when Buffett was being scorned for missing out on the dot-com boom. He shunned technology stocks in the late 1990s, missing out on huge gains. But when the sector crashed from 2000 through 2002, Berkshire shares almost doubled, vindicating the investor.

However, as the housing and credit markets boomed later on in the decade, Berkshire's stakes in financial-services companies like American Express and Wells Fargo remained large, even as he warned that the bubble might burst. See full story.

"He's the best out there, but it's amazing to see how Berkshire was so concentrated in financials," Auxier said.

'Too fast'

Berkshire waded further into the financial sector during the fourth quarter when Buffett bought $5 billion in the preferred stock of investment bank Goldman Sachs Group
GS, -1.03%

He also invested $3 billion in preferred shares issued by General Electric Co.
GE, -0.08%
which has a large, struggling financial-services unit called GE Capital.

The deals came with warrants that give Berkshire the right to buy 43.5 million Goldman shares at $115 each and 134.8 million shares of GE at $22.25 each. These contracts expire in October 2013.

'He dove in too fast and probably wishes he had waited a few months. ... No one, not even Buffett, can call the bottom.'
Mark Sellers, Sellers Capital

Soon after, Buffett wrote in a New York Times editorial that he'd been buying U.S. stocks for his personal account and recommended that other long-term investors do too.

Since that Oct. 17 article, the S&P 500 Index
SPX, -0.23%
has slumped 22%. Goldman shares have dropped 27% since Buffett's investment in the firm was announced Sept. 23, while GE shares have plunged 65% since Berkshire unveiled its investment in the industrial conglomerate on Oct. 1.

"He dove in too fast and probably wishes he had waited a few months," said Mark Sellers, managing partner of hedge fund Sellers Capital LLC. "He hoarded cash for years, waiting, waiting, and then used a lot of it very quickly. No one, not even Buffett, can call the bottom."

Indeed, Buffett was clear in his Oct. 17 editorial that he can't predict the short-term movements of the stock market and has no idea whether stocks will be higher a year from now. However, he stressed that "major" U.S. companies will be generating record profits in five to 20 years' time.

Protection

Many of Buffett's recent investments also have been made further up the capital structure of companies, giving him more protection, commented Sellers.

Preferred shares are senior to common stock and also pay large dividends. Goldman and GE are paying Berkshire 10% a year in dividends for five years.

Berkshire also recently invested in bonds issued by companies including Tiffany & Co.
TIF, +0.74%
and Harley-Davidson Inc.
HOG, -0.49%
These securities pay 10% to 15% a year, according to Justin Fuller, editor of Web site Buffettologist.com and a partner at Midway Capital Research & Management LLC.

"These investments offer equity-like returns but are higher up the capital structure," he said. "It's a no brainer."

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.